NEW YORK, United States — It’s an acquisition that would have been unthinkable even a few years ago: Le Tote, a clothing rental service, is buying Lord & Taylor, the nearly two-century-old department store.
What's more, the start-up even claims to have a plan to fix the ailing retailer, a project that stumped its current owner, Hudson's Bay Co., which has had more luck reviving the more upscale Saks Fifth Avenue. Le Tote Chief Executive Rakesh Tondon told BoF he wants to open dozens more locations on top of the current 38, creating a nationwide chain of department stores that will serve double duty as hubs for subscribers to the $79-a-month rental service to pick up and drop off clothes.
Much of Lord & Taylor's inventory will also be available to rent, considerably boosting Le Tote's selection. Tondon said the physical store network plus the improved selection will give Le Tote an edge in the increasingly crowded field of clothing rental platforms, which includes market leader Rent the Runway and nationwide chains like Ann Taylor, Urban Outfitters and American Eagle.
“The idea is to take advantage of the store locations to give [our customers] a way to shop online and offline,” he said. “The goal is to learn from these stores in the next six to 12 months and roll out more stores in the country — taking this regional chain to be a national chain.”
The acquisition is relatively low-risk for Le Tote, at least in the short term. The company will pay $75 million in cash, plus a $25 million payment due in two years, with no interest. Le Tote gets Lord & Taylor's inventory, e-commerce operations and intellectual property in the deal, but not its real estate, which remains with Hudson's Bay. Le Tote can operate the existing stores rent-free for three years. HBC will also receive a minority stake in Le Tote and two seats on the start-up's board.
The favourable terms and low selling price — the chain sold for $1.2 billion in 2006 — indicate Hudson's Bay was eager to rid itself of its troubled subsidiary.
There’s a big overlap between Lord & Taylor’s customer base and ours.
“This is something called seller financing, where the seller is essentially lending money to the buyer to buy the asset,” said David Tawil, president of Maglan Capital, a distress-focused hedge fund. “This always smacks of desperation.”
Lord & Taylor, which generated more than $1 billion in sales last year, is only the latest department store to grapple with the shifting tides of retail. Barneys filed for Chapter 11 bankruptcy protection last month, while Neiman Marcus Group was able to restructure more than $2.5 billion in debt, but continues to see sales decline.
Even as traditional retail deteriorates, the rental model emerged in recent years as a popular option for consumers. Rent the Runway has raised $337 million over the last decade and is valued at $1 billion (Le Tote has raised $75 million since its founding in 2012). Rent the Runway has opened physical locations in New York, Chicago, San Francisco and Washington, DC and allows customers to drop off clothes at certain WeWork and Nordstrom locations.
For Hudson’s Bay, unloading Lord & Taylor will allow for greater focus on its marquee assets, Saks Fifth Avenue and the Hudson’s Bay department store in Canada, the company said in a statement. Lord & Taylor was responsible for about $89 million in losses in fiscal 2018, the company said.
Le Tote is working with an investment bank and other investors to finance the deal. The start-up has in the past received funding from Andreessen Horowitz, Google Ventures and Azure Capital Partners, among others.
According to Tondon, the deal will result in several immediate benefits for Le Tote, including added inventory for Le Tote’s existing rental customers, who pay $79 to $119 to rent up to 15 items of clothing or accessories a month. In women’s apparel alone, Lord & Taylor carries over 500 brands.
The 38 locations are mostly in the Northeast, where many of Le Tote's customers live. Le Tote plans to keep all current Lord & Taylor employees.
“There’s a big overlap between Lord & Taylor’s customer base and ours,” Tondon said. “Our average customer is 40-years old, theirs is 50 … in terms of household income, location, use cases — our customers are very similar.”
Le Tote will also update the Lord & Taylor stores with a goal of making them profitable in the next 12 months, he said.
Potential new stores could have a smaller footprint — 25,000 square feet versus the current 120,000-square-foot locations, Tondon said. In three years following the deal, Le Tote and Hudson’s Bay will reevaluate the viability of the current 38 locations and HBC will have the option to “recapture select locations” and redevelop them into mixed-use properties. HBC owns the real estate of the majority of the 38 stores, the company said.
Under Helena Foulkes, who was appointed CEO last year, Hudson’s Bay has whittled the weakest parts of its portfolio. It sold off-price retailer Gilt Groupe to Rue La La last year for well under its original purchase price. In June, HBC divested from its German real estate joint venture. HBC shares ended Wednesday up 0.6 percent at $10.22.
In this partnership with Le Tote, Lord & Taylor will join a growing number of traditional retailers to venture into rental. Among them are Ann Taylor, Express, American Eagle, Scotch & Soda and Urban Outfitters, all of which now offer monthly rental services similar to that of Le Tote.